RESP basics

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Making the dream of higher education possible

Whether you’re a parent, grandparent, relative or close family friend, you want to see the young people in your life succeed. And what better way to provide them with a brighter future than through access to post-secondary education?

RESPs, or Registered Education Savings Plans, are a great way to save for post-secondary education, because investment earnings accrue on a tax-deferred basis, and the federal government will deposit a percentage of certain amounts you contribute in the form of a Canada Education Savings Grant (CESG). Certain provinces also have grant programs for beneficiaries who reside in that province. Investment earnings won’t be taxed until the money is withdrawn.

 

RESPs: At a glance

Who can use it

  • Everyone – parents, grandparents, relatives and family friends.

  • Even adults planning to return to school.

     

Main advantages

  • Money invested grows tax-deferred.

  • When money is used to pay for education costs, the investment growth and grant amounts that are part of the withdrawal are taxed as income to the student.

  • Contributions to an RESP can earn Canada Education Savings Grant (CESG) money. The grant can be 20%, 30% or 40% on the first $500 contributed (the amount is dependent on the family income) and 20% on the remaining $2,000 contributed per child per year.

  • Generous contribution limits: up to a lifetime maximum of $50,000 per beneficiary.

  • A wide range of investment options.

  • Family plans allow accumulated earnings to be shared among more than one beneficiary.

 

Potential limitations

  • The growth on contributions and grants must be used for post-secondary education. If the child does not pursue post-secondary education, all CESG money must be returned to the government. However, subscribers can withdraw contributions tax-free, and if the plan meets certain requirements, investment earnings can be rolled into the subscriber’s RRSP (if contribution room is available) or withdrawn in cash.

  • When investment earnings are withdrawn in cash, there is a 20% tax penalty in addition to regular income taxes.

  • There are restrictions on CESG eligibility for beneficiaries 16 years and older.

  • If total contributions made on behalf of a beneficiary exceed $50,000, subscribers may be assessed a 1% penalty tax per month on their share of the excess contribution.

 

Special considerations

  • To qualify for CESG money, plan beneficiaries must have a valid Social Insurance Number and be residents of Canada.

  • Pooled trust plans (also known as “scholarship trusts”) are specialized RESPs that offer many of the advantages of RESPs but have many more restrictions on the use of funds. In addition, the amount of money available to your child is highly dependent on the number of other students in the pool. If you decide to stop contributing to the plan, income earned on your money remains in the pool.